Australia: The New Resource Super Profits Tax and What It Means For Your Portfolio

Wealth Management
Last Updated: 26 May 2010
Article by Martin Fowler

What is the Resource Super Profits Tax?

Conceptually at least, the proposed Resource Super Profits Tax (RSPT) is designed to be a tax on economic rents (economic rent is another word for abnormal or super profits). Economic rent from resource exploration, development and extraction can be defined as the excess of revenue over costs where costs are defined to include a 'normal' rate of return on capital. So in theory, it is a tax that is designed to apply to profits over and above those which are deemed to be 'normal'. Under standard competitive conditions, the presence of excess profitability would attract new entrants and encourage investment in increased productive capacity by established firms. This would increase supply and place downward pressure on commodity prices until economic rents (excess profits) were eliminated. However, economic rent in a mineral resource industry, may persist in the long run owing to the quality or scarcity value of different ore deposits or fossil fuel fields.

Why use it ?

The key objective in resource taxation is to enable the government to obtain some payment in return for the extraction of the community's resources. Ideally, a resource tax system should be designed to ensure that the government receives through this mechanism no more than the value of the economic rent while minimising distortions to private decisions.

Is the imposition of such a tax fair ?

This is clearly a subjective question. By way of background, property rights in the mining sector are granted often by way of leases over land (although some miners may own the land outright). Regardless of ownership, miners need to apply to the Government for a licence to extract resources from the land in return for agreeing, among other things, to pay legislated royalties and taxes.

Lease, exploration and licensing permit fees tend to be minimal in the scheme of things. As an example, In Australia, seven exploration permits in highly prospective areas were assigned on the basis of a cash bonus bid between 1985 and 1992. In 1999 prices, the value of the winning cash bid ranged from $1 million (1992) to $20 million (1985), with an average of $9 million. So the Government (on behalf of all Australians – this is important as this is not supposed to be a political argument) has always looked to royalties (which are based on production not profits) and taxes to ensure that it is adequately compensated for the extraction of non renewable resources.

The problem being that royalty percentages were agreed upon at a time when commodity prices were much lower. Miners like BHP and RIO have enjoyed super normal profits for the best part of a decade as demand from China, India and the rest of the developed world has put upward pressure on commodity prices. Profits have not been eroded, as is normally the case in a competitive market, because of the high barriers to entry imposed. Companies that have rights to mine on lucrative sites do not give these up cheaply in a commodity boom. So we are left in a position where the Government can either do nothing, and let a fortunate few benefit from the commodity boom, or they can act to redistribute the wealth more evenly across all Australians. After all, these minerals are in effect beneficially owned by all Australians. Regardless of which government is in power, the latter option makes sound economic sense. The delicate balancing act of imposing a sensible tax without significantly impacting upon employment and investment is clearly the more difficult, and debatable, aspect.

How is the tax calculated?

In basic terms, a tax of 40% is to be charged on the profit (after costs) derived by a project over an above the return that would 'normally' be expected. In practice, the calculation process is rather complex and beyond the scope of this report.

Nevertheless, a simplistic, but largely theoretical, example follows:


XYZ Company borrows $1,000 at 8%p.a. to invest into a mining project with a 1 year horizon. Revenue made over the project was $3,500. Operating costs totalled $500. Financing costs totalled $80.

Revenue $3,500
Operating costs $500
Capital expenditure $1,000 (deductible over life of mine,1 yr in this example)
Deduction allowed for notional return from 'normal profit': $60
RSPT taxable profit: $1,940
RSPT tax @40%: $776

In addition, XYZ must also pay the company tax (after deducting financing costs and RSPT tax paid) as follows:
Revenue $3,500
Costs & deductible capital expenditure $1,500
RSPT tax paid $776
Interest expense $80
Taxable income for company tax: $1,144
Tax @28%: $320.

In this example actual cash profit before tax was $1,920. Tax paid totalled $1,096, which works out at an effective tax rate of 57%.

(As an aside, BHP has publicly stated that its effective tax rate would increase from 43% to around 57% if the RSPT is implemented).

What is going to be the impact on our preferred resources exposures, including BHP and RIO ?

Analyst estimates of the likely impact on key resource stocks differ widely depending upon the assumptions used. Expected reductions in the Net Present Value (NPV) for BHP and RIO are roughly as follows:


Reduction in NPV

BHP Billiton (BHP)

between 5% and 20%.

Rio Tinto (RIO)

between 9% and 20%

It is important to note that the NPV of a resource company will, and usually does, differ from its share price. Prior to the announcement of the RSPT, analyst estimates of the NPV for BHP ranged from around $45 to $55. For Rio they ranged from about $75 to $95.

Using the midpoints we note the following:

NPV (Before RSPT announcement)

NPV if RSPT is introduced

BHP Billiton



Rio Tinto



As the share prices of both BHP and RIO are currently lower than their implicit value, we recommend clients continue to hold these stocks. As more details of the operation of the RSPT are released, more accurate valuations are likely to become available. It should be noted that further taxation in the sector, including a carbon tax in some shape or form in coming years, cannot be ruled out.

What might happen from here ?

The Government has set out a timetable for preliminary discussion. The main point of conjecture at this stage relates to what is known as the "RSPT allowance rate". The allowance rate (which, conceptually, is similar to the 'normal profit' rate of return) has been proposed to be set annually at the 10 year government bond rate. In our view that logic appears flawed because the 10 year government bond rate is the rate of return possible from investing in what is almost a 'risk free' asset. A mining project of course is much riskier and so it makes sense that a higher rate be used. Indeed the RSPT has been modelled off the existing Petroleum Resource Rent Tax (PRRT). The PRRT applies a hurdle rate to increase the deduction available before the PRRT is levied in a similar way to how the RSPT is proposed to operate. Exploration expense deductions are increased by the 10 year government bond rate plus 15%. Operating expenses are increased by the same bond rate plus 5%. So, while the PRRT has, in our view, correctly taken into account the riskiness of the project, the RSPT has not. This provides reasonable grounds for the mining lobby to argue that the RSPT, in its current form, needs amendment.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.